On the transmission of climate shocks in the Brazilian business cycle

This paper examines how climate shocks in temperature and precipitation affect prices and economic activity in Brazil. To do so, we combine monthly municipal-level geospatial data with a local projections approach, exploring both alternative ways of aggregating the shocks and heterogeneity across biomes. We find that temperature shocks generate clearer and more persistent effects on activity, especially when aggregated by population, while their effects on prices are concentrated in more climate-exposed components, with limited response of underlying inflation. By contrast, precipitation shocks are transmitted mainly through cost-related channels and sensitive segments, particularly food and producer prices, with no robust impact on aggregate activity. These results indicate that climate shocks affect the Brazilian macroeconomy primarily through supply-side channels, although with distinct mechanisms for temperature and precipitation.